China Real Estate Companies are Cheap

The bear came back with a gift of cheap equities. After rising 102% in 2017 the MSCI China Real Estate index fell 5.6% in 8M18. The largest 43 China real estate companies traded in Hong Kong (plus Xinyuan in NY) are down an average of 38% from one year highs and trading at 5.7 times trailing 12 month earnings.

Many China real estate companies have delivered satisfactory results this year despite market concerns about credit tightening, real estate market restrictions, and trade conflict. Aggregate real estate sales were up 14.4% in China in 8M18 by transaction value and 4.2% by floor area (NBS Monthly). CRIC estimates that the top 100 companies reported sales value up 29.9% in 8M18 as larger and listed companies have been gaining market share (CRIC Commentary).

China’s government policy emphasized corporate deleveraging in 1H18 which raised the cost of funds for developers while tight real estate market restrictions kept home sale prices in many cities below fair market value. Slower economic growth and uncertainty resulting from US tariff threats have led to recent policy easing (Koneko commentary). Developers can benefit as real estate changes from being a tool for cooling the economy to a more supportive role.

Shares of Hong Kong real estate investment and development companies have also been weak due to China exposure and concerns that higher interest rates will adversely affect Hong Kong home affordability and prices. The segregation in these tables is approximate since the operations of some of these companies span Hong Kong, China, investment, development, international property, hotel operation, logistics, and infrastructure.

A dovish shift in expectations for US Fed policy and a weaker US dollar would be supportive for the Hong Kong market.